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Analysts Watch E&P 2Qs for Clues to Basin Potentials, Prices

North American exploration and production (E&P) companies will, over the next few weeks, unveil their earnings and operations results for the second quarter, but analysts aren't expecting any big upside surprises. Instead, they hope for details on Marcellus Shale pricing, emerging sweet spots in the Utica Shale and details about wells in several big onshore basins.

Wells Fargo Securities analysts said they were entering the earnings season "with a neutral stance, in what has been a relatively quiet quarter," pointing to shrinking crude premiums, an "unclear" condensate and natural gas liquids (NGL) picture, as well as "ethane issues" in the Marcellus Shale.

Tudor, Pickering, Holt & Co. (TPH) analysts will be watching some of the same things.

"NGLs have been weak and may hit new lows in 3Q2013" as "weakness accelerated to the downside during 2Q2013 with hubs falling 2-3% versus West Texas Intermediate (WTI). Spot market prices are now 34-35%. It's "too early to get bullish but pricing should be near a bottom as propane exports ramp up in the back half of this year."

The Mariner West ethane pipeline, helmed by MarkWest Energy Partners, is ramping up soon (see Shale Daily, Nov. 12, 2012). That pipeline may provide more ethane takeaway capacity, but there still would be low prices to contend with, "trading roughly on par per MMBtu with natural gas," and Wells Fargo.

Wells Fargo analysts "only expect enough ethane removed from the gas stream to meet pipeline specs." Ethane recovery, they said, may not be economical until 2015-2016, when more projects come online, a forecast that matches comments two months ago by Williams CEO Alan Armstrong (see Shale Daily, May 9).

Regional pricing pressure is beginning to impact the Marcellus. Both analysts think it might be a 3Q2013 issue, "but we are starting to see some meaningful discounts to Henry Hub on several pipeline delivery points in the region," said Wells Fargo. The problem "appears to be most acute in the southern Marcellus, and certain zones along the Leidy, Dominion South and Tennessee Gas 300 have seen discounts of 50 cents-$1.20/Mcf in late June and early July."

Operators appear confident that the Marcellus discounts are a short-term problem. "Outside of reduced pricing, not a whole lot of incremental data is coming out of the quarter, as the Marcellus story remains little changed from recent history: ethane rejection, infrastructure expansion and growing production profiles from those in the core acreage," said Wells Fargo.

"We saw gas come close to hitting $4.50 on the quarter before dropping back to a range of $3.50 to $4.00 and we continue to believe gas will be range-bound between $3.50 and $4.50 for some time, with weather being the key determinant on where gas trades within the range."

More insight is hoped for about the Utica Shale, and E&P details on whether it's a true wet gas play or better weighted to dry gas.

In addition, the Williston Basin (think Bakken Shale) is on the radar. Last month, two EOG Resources Inc. wells in the basin were said to produce "with nearly two times the normal sand volume. Turns out, that was only half of it," Wells Fargo said.

EOG hasn't publicly disclosed the results, but the word from nonoperating partners is that wells in the Parshall field "were spaced 160-acres apart, with 15,000-foot laterals completed with 60 stages, nine million pounds of sand and a cemented liner." Early results "show a 170-day average rate that was 70% greater than an legacy offset wells, while another had a 300-day average rate that increased by 30%."

TPH wants also to hear more about Eagle Ford and Bakken degradation in netback margins, which benefited from coastal market access in the first three months of this year. The Brent-WTI spreads should remain relatively tight through the end of summer "as seasonal demand, new outbound pipelines and backwardation continue to spur Cushing draws...Further, we believe by the end of 4Q2013, the remainder of Brent imports will be pushed out of the Gulf by domestic supply," which could dislocate light sweet crude and widen spreads.

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